I wanted to emphasize a point I made in an earlier post with regards to index fund investing and macro trends. I view long only indexing as a subset of macro investing. That is, I think that all long only index fund investors are making an implicit bullish macro forecast because the positive performance of their underlying portfolio will rely enormously on a positive macro trend.
To emphasize the importance of this point I wanted to highlight the dismal performance of some of the world’s large stocks markets in the last 10-20 years. I doubt the index fund providers of the world are hauling in customers in these markets:
Now, none of this is an intent to bad mouth index fund investing. After all, I am a macro guy and I think indexing is part of macro so I don’t bite the hand that feeds me! So I am a huge advocate of indexing. I am an even bigger fan of cutting frictions out where you can. But I also think it’s important to build a process for portfolio construction and that process requires a specific understanding of what you’re doing when you design that process. Going into a long only index fund approach based on the misconception that you’re “not forecasting” the future is a little naive in my view and misconstrues what that process is based on in the first place.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.